Tanzania: Plug Loopholes or Lose Revenue from Gas Discoveries - CAG

Posted on :Thursday , 27th April 2017

Dar es Salaam — The Controller and Auditor General (CAG) has cautioned the government that the country is facing several risks of losing substantial revenue from the huge discoveries of natural gas unless measures are taken to plug loopholes.

According to a recent report by CAG Mussa Assad, the natural gas bonanza cannot build a strong economy to lift many Tanzanians from poverty unless several measures are taken on managing the process of exploration, procurement, production, processing, distribution, trading and revenue generation.

Prof Assad says there is no shortcut to the country's road to building a strong economy based on natural gas because there are weaknesses.

He advises that corrections be made avert problems that occurred in several countries that have experienced huge discoveries of hydrocarbons, particularly crude oil.

"Audits conducted indicated that the government was not adequately managing different categories of risks that potentially affect or will affect the realisation of the government in benefiting from oil and natural gas sector," reads part of the CAG report.

According to CAG, even the Ministry of Energy and Minerals (MEM) has failed to measure performances as it wants to build a gas economy for attaining national Vision 2025 to attain a middle-income status.

Dutch disease

The CAG analysis of possible oil and gas business clearly indicates that the country faces mounting tasks of avoiding the danger of the Dutch disease which has been breeding social problems in the countries that are enjoying natural resources bonanza like Nigeria, Angola, Chad, DR Congo and Sudan.

Among the key risks identified by the CAG are inexperience and low skills in managing the resources (weak human capital), weak oil and gas infrastructure, poor preparation in terms of institutional and regulatory frameworks, poor coordination and risk of losing geological data that are necessary for monitoring the performance of the oil and gas sub-sector.

It been pointed out that the Tanzania Petroleum Development Corporation (TPDC) is not in full control of quality, accuracy and quantity of geophysical and geological data they managed. A system to prevent geological and geophysical data loss is inadequately functioning, according to CAG.

"TPDC use server-based devices for data storage but there was no centralised data server system to back up the available information in case of emergency," report reads.

The performance audit on the implementation of Local Content Provisions and Verification of recoverable costs noted that there was inadequate implementation of provisions as per production sharing agreements (PSAs). The provision for employment of Tanzanians, procurement of local goods and services, training of local experts and participation in PSAs in oil and gas business were not achieved, according to CAG.

According to the report, other weaknesses are improper process of managing operations of international oil companies (IOCs), lack of guidelines in implementing local content policy, unsound PSAs, unsound plan for human resources training, weak international tax unit within the Tanzania Revenue Authority for tracking tax revenue.

"TPDC did not prepare performance reports to highlight periodical progress made on the area of procurement of IOCs for the exploration and development of natural gas."

Strategic plans hazy

Others are absence of clear performance indicators and system of monitoring and evaluation, absence of strategic plans with clear priorities, absence of national report on environmental impact assessment for oil and gas sub-sector and lack of clear guidelines on PSAs.

"The audits revealed that there were no effective performance indicators to monitor the status of geophysical and geological data management activities. Reports indicate that MEM does not effectively use performance indicators in their operations," reads CAG report.

"MEM formulated M&E [monitoring and evaluation] strategy which covered years 2011/12 to 2015/16 However, it was noted that the performance indicators in the strategy did not include issues related to local content. Also, it did not mention how the local content issues were to be monitored and evaluated by the MEM," CAG reports reads.

The exposure of the weaknesses has come at time when the country is implementing a five-year plan to build an industrial economy.

Regarding what should be done, CAG recommends that the government increase the capacity of managing the whole process of exploration, production, processing, building gas infrastructure, supervise marketing, trading and ensuring that there are strong linkages with other sectors of the national economy to ensure equitable distribution of wealth to Tanzanians.

On the risk arising from a failure of Tanzanians to own gas infrastructure, CAG has pointed out that the government has already lost huge benefits from the Songosongo gas pipeline.

The country has discovered 57.2 trillion cubic feet of natural gas mostly from offshores while onshore exploration is still going on. It is also important to take in mind that there is ongoing competition on the oil and gas exploration among Eastern African countries.

Mozambique has discovered 100 trillion cubic feet of natural gas. While Tanzania is at an advanced stage of negotiations for Liquefied Natural Gas (LNG) project supervised by Statoil, Mozambique is still in the early stage for LNG negotiations.

Sh22m investment

According to Statoil report of 2015, Statoil signed a PSA for block 2 with TPDC in 2007, whereby its investment value up to 2014. had amounted to NOK 2.01 billion (Sh5.1 trillion).

This huge investment before any profit earning is equivalent to a quarter of government budget for 2015/16.

"The block covers 5,500 square kilometres and lies in water depths between 1,500 and 3,000 metres. Statoil Tanzania is the operator with 65 per cent working interest, cooperates with ExxonMobil Exploration and Production Limited as a partner with 35 per cent interest," reads part of Statoil report.

The construction of LNG plant is expected to take up to 40 months at the cost of $30billion with production expected to commence in 2021 or 2022, according to the 2016 report from Statoil.

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